About the fund
The Lowes UK Defined Strategy Fund is an actively managed fund comprising a number of defined investment strategies where the potential returns earned within the Fund are typically fixed in nature and linked to the performance of one or more established stock market indices, such as the FTSE 100 Index.
The Fund is managed by Lowes Financial Management Limited and capitalises upon skills and structured investment selection success enjoyed by Lowes clients, built up over several decades.
Fortem Capital Limited acts as investment adviser to the investment manager, providing information, guidance and assistance with risk management.
The Fund is authorised in Ireland by the Central Bank of Ireland.
The value of investments can fall as well as rise. You may get back less than you invested.
The Fund seeks to generate returns in excess of those earned on cash (as measured by three months LIBOR) plus 5% over the medium-to-long-term.
The investment managers at Lowes have been selecting the types of strategies included in the Fund for many years, with clients seeing this through recommendations to invest in one or more structured investment plans. The Fund builds on this concept, offering investors exposure to several investment counterparties and a range of potential durational returns, all linked to the performance of established market indices.
The style of investment favoured by the investment managers is called the autocall or ‘kick-out’ which, although they can be for as long as ten years, have earlier return trigger points whereby the investment return is crystallised and subsequently reinvested.
For illustration, it is quite possible that the investment managers may invest in a strategy that has a maximum duration of up to say, eight years. However, should the FTSE 100 Index be at or above its starting level after two years, it would pay its return at that point, albeit a return less than may potentially have been returned had the investment continued.
The investment managers repeat this process and expect the Fund to have exposure to many such strategies at any given point in time, all at different stages in their investment lifecycle. Through this process the Fund’s investments are then diversified not only in terms of investment counterparties but potential return profiles.
The investment managers have full discretion as to the investments they select; potential returns; duration and counterparties. They may also decide to sell investments ahead of a potential return date, should it represent good value on a comparative basis, e.g. where strong market performance implies that an earlier return would be more profitable.
The use of capital protection barriers mitigates, but does not eliminate, the risk to capital in the event of a prolonged market downturn.
Example of a typical strategy
The Fund invests in many strategies and the diagram below shows returns from one potential strategy within the Fund.
Please note that this is only an example and the strategies used vary to reflect market conditions at the time of investment. The example used was typical of what may have been possible based on market conditions on 22 October 2018; It assumes investment in the strategy was made at inception and was held continuously until it ceased after eight years at the latest. Individual strategies may be dependent upon named banks meeting their obligations.
Why such strategies?
The strategies being utilised are based on those found in structured investments. Such investments have been a feature of the investment landscape since the late nineteen-eighties and have, over time, settled on a form that oﬀers investors a fixed return depending on certain performance criteria, with the potential to mature early if certain market conditions prevail. In the UK the reference asset is most often the FTSE 100 Index, where the return would be triggered if the Index was, say, at or above its initial level on an anniversary date. Returns are pre-defined, fixed and accrue the longer the investment remains in force.
The appeal of structured investments is the defined nature of the potential return. Such investments, like equities, can be subject to capital losses. Unlike equities, the potential for such a loss is defined. However, equities will potentially have the benefit of producing dividends which may partially offset any losses made.
To mitigate the potential for capital loss, Lowes has led the move towards longer-duration structured investments. This increases the number of earlier return opportunities, and the potential for capital loss being observed after eight or ten years, and then only if the investment has not matured at an earlier observation date.
It is the defined-return element of a structured investment, along with the potential to mitigate risk to capital that allows a fund such as the Lowes UK Defined Strategy Fund to target such competitive returns. Be aware that capital is still at risk.